Whenever I am handed out a new assignment, Lao Tzu always crosses my mind - "A good traveller has no fixed plans and is not intent on arriving". Sadly enough, neither my boss, nor the clients ever seem to agree...
...which leads to some memoirs from "The Chronic Traveller's Diary" - Having seemingly survived Continental Europe as a vegan (and yes, including the inevitable sacrifice of piquancy) and with just English on my linguistic arsenal, I was exultant to have to be in the Land of the Brits. Apart from the cold weather, which you could easily mistake for a North Indian winter, I was pretty much at home. And comes with that is the ability to find vegan, especially curry in abundance. And one day, I was out with a good ol' friend for lunch. Even as the food arrived, we were still not done jabbering; when suddenly, I felt tasting something unpleasant. I gestured to the waitress. "Is this Veneziana?" I queried as she came up. "Oh! This is the Americano your friend ordered" she said and coolly switched our plates. "Everything's ok, now?" she remarked with a beaming smile.
As we were dragging ourselves back to work, I couldn't help but think if this one experience would put me off visiting this Pizzeria? If so, would it because of the bad initial service encounter, or, perhaps the ignorance to realize their mistake? In the financial services world, the Operational Risk Pundits would have loved to pounce on it and call it a "Reputational Risk Event". But, hang on, what if you were marooned on an island, waiting for Captain James Cook to make contact, where this was the only food source; hypothetically? Well, there's no bothering about risk, if it's not going to blow into a loss, is it?
With an over-arching risk like reputational, an unimaginable amount of factors come into play - Market dynamics like competition, which in effect is governed by entry and exit barriers, which is again predicated on a series of other factors. How feasible is it going to be setting up a new restaurant in an island, esp. given that island tribes aren't known a whole lot to be fond of Pizzas? [Sarcasm]. In banking parlance, this effect is more magnified. For one; we don't have financial mom and pop stores cropping up on every street corner - Regulatory and financial barriers are high! We can however, most certainly be glad that Banking Industry a'int a monopoly.
While most certainly banks may not be worried about a new competitor, they would need to fear 'churn'. All said, reputational risk is really a function of market perception of operational risk management failures within the bank. (Now...Why didn't I say "function of Operational Risk Management"?...Hmm). A single risk management failure casts a cloud of cognitive bias on the risk management capabilities of the bank. Here, the assumption that such a reputational risk event would lead to losses is based on the notion of revenue thinning on account of customer churn. But, what would happen when every competitor (or majority of the big boys, atleast) has a similar breakdown of risk management? Ah, well...the credit crisis wasn't so long ago, was it? We could go with everyone's guilty and hence even, I suppose!
Clearly, as something of concern to a bank, reputational risk is narrower than it may sound, only referring to those events negatively affecting its revenue stream. For instance, a bank failing to fulfil its 'social' responsibilities, though probably, taking a hammer on its 'reputation', would not suffer a reputational risk as it does not cast a slur on its 'money-making competencies'. Rather it should act as a point in its favour, since the money can be deployed for better purposes. How do mortgage backed securities sound, for a start? [Sarcasm]